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Foreign Interns in the US: Tax Rules for Internships in America

International students in the US can gain valuable work experience through summer internship programs such as the USCIS Optional Practical Training (OPT) program. These internships not only benefit American employers by attracting top talent, but also provide students with hands-on experience, professional skills development and networking opportunities. and Tax Rules for Internships in America.

Understanding Optional Practical Training (OPT)
The Optional Practical Training (OPT) program, administered by USCIS, provides temporary employment directly related to an F-1 student’s primary field of study. This program provides up to 12 months of work authorization for students entering the US under an F-1 student visa.

Tax withholding and reporting responsibilities
Employers often have questions about federal income and social security (FICA) tax withholding and reporting responsibilities for international student interns. The KPMG report, ‘Mobility Matters – Understanding US tax obligations of international student interns’, provides a detailed overview of these obligations.

Where to start: Determining tax residency status
Under U.S. income tax laws, a foreign citizen or national may be taxed differently based on their residency status. Residents are taxed on worldwide income and are entitled to the same deductions and credits as U.S. citizens. However, non-residents are only taxed on income from US sources, such as income from personal services performed in the US.

The first step in determining an international student’s U.S. federal income tax obligations, and the employer’s corresponding withholding and reporting responsibilities, is to determine the student’s tax residency.

US tax residency
An international student’s residency status is affected by their immigration classification and the number of days he or she is present in the U.S. during three calendar years. Students present in the US on an F visa are initially treated as non-residents. They can become tax residents by obtaining a green card or by meeting the “substantial presence” test.

A foreign national who is present in the U.S. for 31 days during the calendar year and whose total number of days of presence in the U.S. is 183 days or more over a three-year period (based on a specific calculation method) is considered a US resident

Exemptions and exceptions
U.S. lawmakers have recognized situations in which taxing an individual as a U.S. resident may be inappropriate. A waiver to the substantial attendance test is available for individuals coming to the U.S. to learn. Days spent as an “exempt individual” (including students) do not count towards the substantial attendance test.

However, this exemption does not apply indefinitely. Generally, a student cannot be treated as an exempt person if he or she has held this status for any part of more than five calendar years. A student who has been in the US for more than five years can still be considered a non-resident if he or she meets the F visa requirements and does not intend to reside in the US permanently.

Submission Requirements
A student who qualifies to exclude days of presence in the U.S. must file Form 8843, Declaration for Exempt Persons and Persons with Medical Conditions, with the Internal Revenue Service (IRS).

US federal income tax
Although a student may be an exempt individual for purposes of determining tax residency, he or she is not exempt from U.S. income tax. Non-resident students working in the US for a US employer are subject to federal income tax on US-source income at regular tax rates.

Both employers and international students must ensure F visa requirements are met to qualify for tax relief. Employers should also ensure they have the appropriate processes in place to document and comply with their U.S. tax withholding and reporting obligations.

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